The Irish Tax Institute Fantasy Budget Competition

Fantasy Tax Competition Submission
UCD Group A4
November 2, 2014
Group Members: Student Numbers:
Nicole Basquel 12498122
Sinead Feely 12535707
Rachel Breslin 09579923
Lecturer: Dr Geraldine Doyle
Word Count: 2581 (excluding bibliography)
Contact details: (086) 325 2572, [studentnumber]@ucdconnect.ie

2 Group'A4'UCD''''''''''''''''''''''''''''''''''Irish'Tax'Institute'Fantasy'Budget'Competition'2015'
Introduction
Budget 2015 was delivered on October 15th
amidst a renewed positive economic
outlook with strong indications of recovery. Falling unemployment to 2009 levels1
, the
IMF doubling of their growth prediction to 3.6%2
and Exchequer tax returns at 5.6%
higher than forecast3
created hope that Budget 2015 would offer long-awaited repreive
from austerity measures for Irish taxpayers.
This optimism was shared by the Government when Minister for Finance Michael
Noonan announced a budget focused on ”securing the recovery, building for the future
and broadening it to families across the country.” But do the budgetary measures
succeed in these aims? How will they impact Irish families, indigenous businesses and
foreign investment into Ireland?
This report examines three of the changes made in this years budget, including
changes to the income tax structure, removal of the “Double Irish” taxation practice and
introduction of a tax relief from the oft-criticised water charges. Following this analysis
we identified a missed opportunity from the Government in Budget 2015 – stimulating
economic and population growth outside of Dublin. To address this we have designed a
targeted development incentive combining tax incentives for corporations and
employees to encourage trade and utilise unoccupied housing.
Contents:
1. Analysis of Budget 2015:
1.1 Changes to the income tax rate structure
1.2 Removal of the “Double Irish”
1.3 Introduction of a water tax relief
2. Suggested Budget Measure
2.1 National commercial development incentive
3. Conclusion
4. Bibliography

1. Analysis of Budget 2015
1.1. Changes to the Income Tax Rate Structures
Budget 2015 saw the Government seek to alleviate pressure on low and middle income
earners by restructuring the income and USC tax brackets. The top rate of income tax
was reduced by 1% to 40% and the level at which people begin paying the higher rate
increased by €1,000 to €33,800 for single people and €42,800 for married couples with
one earner4
.
There were also changes to the Universal Social Charge brackets. The new USC rates
are:
• Up to €12,013: no USC charge
• €12,013-€17,576 at 3.5%,
• €17,577-€70,044 at 7%,
• €70,045-€100,000 at 8%,
• PAYE income in excess of €100,000 at 8%, and,
• Self- Employed income in excess of €100,000 at 11%
These measures will have a small positive impact on families and individuals on low or
middle incomes. It will particularly benefit low paid part-time workers earning between
€10,000 and €12,013 who will now fall outside the USC tax net entirely. It is clear that
the government hopes that these increases in take-home pay will kick-start spending
and economic growth, particularly in the retail and services sector.
However, higher income earners will see relatively no change in their take home pay as
they will be expected to pay the USC at a new increased rate. Thus, when combined
with the effect of the introduction of water charges this year many families will see a
negligble impact on their financial position and may well be disappointed that budget
2015 offered no signiifcant repreive following years of austerity measures.
Budget 2015 brought particular disappointment for indigenous Irish businesses through
the increase in the top level of USC for sole traders earning over €100,0005
. This acts
as a disincentive for entrepreneurship despite the emphasis the Government has placed
on encouraging Irish business. The disincentive of higher taxes on sole traders is a
regressive move penalising taxayers who contributing to growth and creating jobs. Sole
traders are already paying higher taxes than horizontally-comparable peers whilst
receiving fewer social benefits and therefore these USC increase hitting this group is
unjustified and contrast with the Government’s enterprise strategy.

Positively, there were some encouraging measures for indigenous Irish businesses. The
Foreign Earnings Deduction has been extended until the end of 2017 and has increased
the number of countries included, while also reducing the minimum number of days to
qualify. These changes are beneficial to companies hoping to expand abroad.
There were also income tax changes supporting the strategic goal of attracting foreign
direct investment through changes to the Special Assignee Relief Programme. The
programme has been extended to 2017 and the upper limit of €500,000 has been
removed. These changes will increase Ireland’s attractiveness to higher paid executives
from abroad and thus to the companies they lead. However, the other income tax
changes in Budget 2015 will do little to attract high-earning executives. While the higher
rate of income tax was reduced for people earning over €70,000 a year the marginal tax
rate remains at 52%. This is higher than many countries competing for the same pool of
foreign investment including the UK, US, France and Germany6
therefore acts as a
disincentive to internationally-mobile businesses considering expansion/relocation7
.
€293%
€146%
€196%
€288%
€576%
€727% €727% €727%
€0%
€100%
€200%
€300%
€400%
€500%
€600%
€700%
€800%
12,000% 15,000% 25,000% 35,000% 55,000% 75,000% 100,000% 150,000%
IncomeTaxSavingsPerAnnum
Gross Pay Per Annum
Estimated Budget 2015 Income Tax
Change Benefit
Source: Taxation Annex to Budget
2015 Summary Measures

1.2. Removal of the “Double Irish” Taxation Scheme
Amidst strong and growing international scrutiny and pressure the Government closed
the “Double Irish” scheme in Budget 2015. This loophole allowed companies to pay little
or no corporation tax by taking advantage of Ireland’s rule that Irish registered
companies do not have to be tax resident. By funnelling royalty payments for intellectual
property from one Irish-registered subsidiary to another withe latter is usually tax
resident in a country with no or low corporate income taxes such as the Cayman Islands
companies could reduce their tax liability.
The technique has been widely used by large US multinationals with subsidiaries in
Ireland such as Abbott Laboratories, Apple, Google, General Electric and Starbucks.
However, with public criticism from high-profile U.S. Politicians8
, the EU Commission
and the OECD claiming the move gave Ireland an unethical advantage over countries
competing for investment, Ireland was coming under increasing pressure to remove the
loophole.
The removal of the Double Irish will see tax liabilities increase for the many multinational
companies who currently implement this technique. Multinationals are crucial to the Irish
economic strategy, employing over 146,000 people9
and a measure that would
negatively affect the choice of both current and would-be multinationals from residing,
operating and investing in Ireland would have a multi-billion euro economic impact.
But given a changing global tax landscape it appears the preemptive move is a prudent
and well-structured one that will have little negative impact. With such “double-tax”
arrangements receiving worldwide negative publicity and international legal scrutiny
Ireland may just be the first of a number of countries to eliminate the scheme. The EU
Commission may put even more pressure on other countries like the Netherlands to
close such a loophole having seen a successful outcome from such pressure in Ireland.
Furthermore, the phased nature of the removal i.e. for new entrant companies to Ireland
in 2015 and in 2020 for existing companies in Ireland offers certainty as companies
have time to plan their structural affairs in advance.
The announcement of the removal of the Double Irish was accompanied by the
announcement of a proposed new “knowledge box” scheme. Full details of the scheme
have not been finalised but it would offer tax incentives for companies to develop new
technology in Ireland, generating revenye and creating jobs.

This new scheme, however, must be careful not to fall into the same reputational pitfalls
as the Double Irish or the changes would be redundant or worse reputationally for the
Irish state and have a negative impact on investment attractiveness. The New York
Times has already published a scathing editorial criticising the Government for
announcing the Knowledge Development Box while scrapping the Double Irish.10
The
newspaper claimed Ireland appeared "uninterested in true reform" under a headline,
'Ireland, Still Addicted to Tax Breaks'.
1.3. Introduction of a Water Charges Relief
With Budget 2015 being delivered as a General Election in 2016 looms and just three
days after 100,000 people marched through Dublin in protest against water charges it
was of little surprise that the Budget sought to reduce the impact of the charges.
Budget 2015 announed an income tax relief which will allow taxpayers who are in the
lower income tax rate of 20% to claim tax relief of 20% of their water charges, up to a
maximum of €100 a year. Irish Water has estimated that the average annual household
cost will be €248 and thus the relief equates to an average €48 annual saving. The
budget also announced a water support payment to households who are in receipt of
the Households Benefits Package or the Fuel Allowance. The total cost of the reliefs to
the government is estimated to be €40m per annum.
These reliefs however appear rushed and may fail to assist those intended. Indeed,
since the announcement of Budget 2015 there have been continued water protests and
the Tanaiste stated the Government’s intention to bring in further water tax reliefs.11
By
offering the relief as a tax credit the measure will fail to benefit many of the 280,000
people with incomes are below the income tax threshold, many of whom are not eligible
for the Households Benefit Package. Additionally, the Fuel Allowance is only available
to the long-term unemployed so the water support payment will not be accessible to the
190,000 short-term unemployed who do not qualify for the payment.
The ICTU have criticised the government for failing to address the problem associated
with lower income households and the affordability of the water charges. For a lower
income family to qualify for the full €100 relief, the remainder of their payable bill will be
€400 or more. This figure is daunting for low income users who are already financially
struggling.

2. Suggested Budget Measure
2.1. National Commercial Development Incentive
We identified three linked issues in Ireland not addressed by Budget 2015:
1. Unemployment and lack of commercial enterprises outside of Dublin
2. Excess demand for housing in Dublin
3. Oversupply of housing outside of Dublin and the plethora of “ghost estates”
The Irish property landscape is currently a divided one. Undersupply in Dublin has sent
prices and rents soaring while in many areas of the country property sales remain static
with an oversupply resulting in over 100,00012
finished and unfinished homes forming
wasteful “ghost estates”.
Property prices in Dublin are rising at a rate up to 2.7% per month13
, pricing thousands
of families and individuals on lower incomes out of the market. It has created an urgent
need for social housing, an issue the government have tried to address in Budget 2015
by allocating €2.2bn towards building 10,000 such houses. But with over 20,000
applicants14
on the Dublin social housing waiting lists and as of September 2014 156
families being accommodated in hotels15
the scheme outlined in Budget 2015 is not
enough. The measure fails to tackle the root causes of the problem that a growing
number of economists, politicians and commentators are labelling as critical.
Contrastingly, in counties including Limerick, Donegal, Clare Leitrim and Mayo housing
prices are continuing to decrease and over 100,000 houses remain empty or unfinished
in Connaught, Munster and Ulster16
. The problem is not a scarcity of housing but a
24.9%
27.9% 29.2%
17.8%
5.5%
2.3% 2.4% /0.3% /0.5% /1.9% /2.7%
/5%
0%
5%
10%
15%
20%
25%
30%
35%
% Annual Property Price Change 2014
Source: Daft.ie House Report Q 2014

scarcity of housing in areas where people want to set up home. We believe that this
want is fuelled by employment.
To address these issues we propose the charging of a reduced rate of corporation tax
of 12% for seven years to companies establishing in Ireland if they establish in zoned
rural areas. This will encourage large international companies to set up in these areas
and offer attractive employment and lifestyle opportunities to skilled workers outside of
Dublin.
The benefits of this proposal include:
• Reduce the insatiable demand for housing in the capital and thus the housing
prices bubble, making the market more accessible for individuals and families
and reduce demand for social housing.
• Increase demand for housing outside of Dublin lifting thousands from the trap of
negative equity as house prices rise in a sustainable manner.
• Stimulate the decimated construction sector in these areas to finish partially built
homes in ghost estates and build new homes where required.
• Reduce unemployment, particularly in these areas where unemployment is
above the national average and bring young, skilled workers and families back to
these areas which will regenerate rural Ireland, heaviest hit by unemployment
and emmigration during the economic crisis.
• Generate funds for the Exchequer through large and medium enterprises
establishing in Ireland and paying corporation tax, additional stamp duty,
consumption taxes in these areas and additional small and medium businesses
establishing to cater for a growing population providing the double benefit of
reduced unemployment and people joining the tax pool.
We recognise the importance of the certainty of the 12.5% tax rate to Ireland’s economy
and enterprise promotion efforts. However, we feel that the short and targeted nature of
this scheme merits a business-positive exception. Areas such as the south and west of
Ireland are on the periphery of the European Union and a transparent scheme to
address these economic problems benefits not just these areas but the Irish and
European Union economies as a whole.

3. Conclusion
Budget 2015 succeeded in bringing some long-awaited growth measures and taxation
reliefs to Ireland’s taxpayers. The proactive step of removing the “Double Irish” and the
introduction of the “Knowledge Box” will have a positive impact on Ireland’s tax
reputation internationally and continue to see multinationals chose Ireland as a location
for investment. For individuals and families, the income taxation changes will mean
small increases in take home pay and some will qualify for additional tax relief to reduce
the impact of water charges. These measures are perhaps symbolically more important
than financially impactful to families as the end of cuts and austerity measures offers
much hope for future budgets and economic growth.
The limited impact Budget 2015 will have on households, individuals and businesses
underlines the Government’s message of a tentative economic recovery. This budget
could have done more to ensure that the reliefs introduced had a larger impact on
intended beneficiaries such as through a more comprehensive water tax relief proposal
and measures that encouraged rather than increased the tax burden for higher-earning
self-employed taxpayers and entrepreneurs.
Pressing social issues such as the undersupply of housing for young professionals and
families to buy or rent in Dublin, a stagnant property market outside of the Capital and a
geographically unevan recovery spurred by foreign investment were not addressed and
a proposed Budgetary measure to positively impact these three interlinked issues is
outlined in this report. It is hoped that the Government will act on these issues in the
near future to ensure that people of all generations and across all of Ireland will
experience much-awaited economic recovary.
For the first time since 2007 Budget 2015 brought no net cut to the Irish taxpayers.
Comparitavely, the cumulative spending increases of €1bn may seem like a jackpot. But
overall, this budget was cautiously positive, offering small benefits to taxpayers and a
strong reaffirmation of Ireland’s attractiveness for foreign investment.

4. Bibliography
1. Central Statistics Office Live Register Statistical Release, October 1 2014. Available:
http://www.cso.ie/en/releasesandpublications/er/lr/liveregisterseptember2014/#.VFaliovk
fgI. Last Accessed Nov 02 2014.
2. Yukhananov, A.,Irish Independent, “IMF Doubles GDP Forecast but Cuts Global
2. Yukhananov, A.,Irish Independent, “IMF Doubles GDP Forecast but Cuts Global
Outlook”, October 08 2014. Available: http://www.independent.ie/business/irish/imf-
doubles-irish-gdp-forecast-but-cuts-global-outlook-30647089.html. Last Accessed Nov
02 2014.
3. Beesley, A., The Irish Times, “Exchequer Returns Signal Scope for Easier Budget
2015”, June 05 2014. Available: http://www.irishtimes.com/news/politics/exchequer-
returns-signal-scope-for-easier-2015-budget-1.1820916. Last accessed Nov 02 2014.
4. Kenny, C., The Irish Times, “Budget 2015: Main Points”, October 16 2014. Available:
http://www.irishtimes.com/business/economy/budget-2015-main-points-1.1962879. Last
accessed Nov 02 2014.
5. Kenny, C. as per footnote 4, above.
6. IBEC, “Debunking Irish Income Tax Myths”, published September 2014, Available:
http://www.ibec.ie/IBEC/Press/PressPublicationsdoclib3.nsf/vPages/Newsroom~new-
ibec-report-debunking-income-tax-myths-28-09-
2014/$file/Debunking+Irish+income+tax+myths.pdf. Last Accessed Nov 02 2014.
7. Mahon, P. (2014). “Are we There Yet? Budget 2015”, PwC. Available:
http://download.pwc.com/ie/pubs/2014-pwc-ireland-are-we-there-yet-budget-2015.pdf.
Last accessed Nov 02 2014.
8. O Connor, N. “Top US Politician Launches Assault on Irish Tax Laws”, June 08 2014.
Available: http://www.independent.ie/business/irish/top-us-politician-launches-assault-
on-irish-tax-laws-30337467.html. Last accessed Nov 02 2014.
9. Bohan, C., “Over 13,000 Multinational Jobs Created in Ireland Last Year”, Jan 05
2014. Available: http://businessetc.thejournal.ie/over-13000-multinational-jobs-created-
in-ireland-last-year-320498-Jan2012/. Last accessed Nov 02 2014.

10. The New York Times, Editorial, “Ireland, Still Addicted to Tax Breaks”, Oct 19 2014.
Available: http://www.nytimes.com/2014/10/20/opinion/ireland-still-addicted-to-tax-
breaks.html?_r=0. Last accessed Nov 02 2014.
11. RTE News, “Tánaiste Says Government Is Examining 'Fair Price' For Water”,
October 31 2014. Available: http://www.rte.ie/news/2014/1031/655964-water/. Last
accessed Nov 02 2014.
12. Webb, N., The Irish Independent, “It’ll Take Us 43 Years to Fill All Empty Houses”,
June 10 2012. Available: http://www.independent.ie/business/irish/itll-take-us-43-years-
to-fill-all-empty-houses-26863864.html. Last accessed Nov 02 2014.
13. Gleeson, C., “Property Prices to Rise 15% Higer Than Last Year”, October 22 2014.
Available: http://www.irishtimes.com/news/ireland/irish-news/property-prices-rise-to-15-
per-cent-higher-than-last-year-1.1972669. Last accessed Nov 02 2014.
14. Kelly, O., The Irish Times, “Housing Measure will help Dublin's Crisis but not in the
Short Term.” October 16 2014. Available:
http://www.irishtimes.com/news/environment/housing-measure-will-help-dublin-s-crisis-
but-not-in-the-short-term-1.1964266. Last accessed Nov 02 2014.
15. Lyons, R. (2013), Daft.ie Q3 Sales Report 2013, “Supply Shortages, Not a New
Bubble, the Concern in Dublin”, Available: https://www.daft.ie/report/ronan-lyons-
2013q3-sale. Last accessed Nov 02 2014.
16. Lyons, R. (2014), Daft.ie Q4 Sales Report 2014, “Cacaphony of Voices Shouldn’t
Mask the Simple Steps to Fix Housing”. Available:
https://c1.dmstatic.com/607/report/Daft-House-Price-Report-Q3-2014.pdf. Last
Accessed Nov 02 2014.

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